Microsoft + Yahoo Still Doesn't Make Sense

There are, broadly speaking, two kinds of business deals: The kind that gets done because it’s clearly a good idea, and the kind that’s done because it’s the best idea anyone could come up with. The difference, of course, is that the latter usually ends up creating a mess.

Now that Microsoft and Yahoo are starting to once again shoot coy glances at each other, with suggestions that Yahoo may either outsource or sell outright its search business to Microsoft, it begs the question: Which kind of deal is this? The answer — no matter how much either company may hint that it would make sense — is that it’s the kind of deal that’s only going to happen because neither one of them had any better ideas.

In concept, the sale of Yahoo’s search assets to Microsoft has good logic behind it. It would give Yahoo cash up front and a share of search revenue for several years, shoring up its ability to refocus on other areas. And it would leave Microsoft with the most viable competitor Google has faced in a while. With concerns growing about Google’s domination of our online activities, some Internet users would welcome a good alternative.

But once you get down to the details of how the deal would work, it starts to make less sense. Unless the terms are different from what Microsoft proposed last year, this deal could prove messy for both companies in several ways.

Yahoo’s interest appears to hinge on its using search data to better target its graphic ads. But Microsoft would also use it for ads that compete with Yahoo, potentially undermining the very core of Yahoo’s revenue generation. Never mind that if people are skittish about sharing personal data with one company, they’re unlikely to want to share it with two.

Search innovation seems to thrive in a more creative corporate culture, like Google’s. Microsoft’s culture is relatively straight-laced — so from the perspective of innovation, it might make more sense for Microsoft to sell its search business to Yahoo. After all, Yahoo’s market share has been gaining in recent months, and its ability to target users has been winning positive reviews.

Microsoft has struggled with its search business, and there’s little reason to think buying Yahoo’s search business will change that. As a brand, live.com may not catch on fire. Meanwhile, Yahoo’s brand will be weakened without search. It’s not really clear what Yahoo is without its own search technology. Aside from a few notable exceptions like Flickr, its non-search entities are largely artifacts of Web 1.0.

Finally, there’s the issue of money. Last summer, Microsoft’s bid for Yahoo’s search assets was valued at $35 a share. Yahoo has been lately trading around a third of that. Will Yahoo settle for a big discount now that its share of searches is growing? Will Microsoft shareholders stand for a hefty premium to Yahoo’s market value? Someone — maybe everyone — will be unhappy with the price.

Under new CEO Carol Bartz, Yahoo has started to make some of the hard decisions that it evaded for years. Under her leadership, the company could emerge as a key player in online media. The last thing Yahoo needs is a distraction from that work, and selling a crown jewel to Microsoft could turn out to be just that.